Are you a director of a company that is struggling to pay its debts?
Perhaps creditors are threatening action, cash flow problems persist, or you are unsure about your duties as a director.
If so, in Australia, it is important to understand what company administration involves and to seek advice early.
Acting promptly may preserve options that will no longer be available if the company’s financial position deteriorates.
Administration in Insolvency Law
In Australian corporate insolvency law, administration is a formal process under Part 5.3A of the Corporations Act 2001 (Cth). An external administrator is appointed to take control of a company while its business, property, affairs and financial circumstances are investigated and creditors consider the company’s future.
The purpose of administration is to administer the company’s affairs in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence. If that is not possible, the aim is to produce a better return for creditors and members than an immediate winding up would produce.
What does it mean when a company goes into administration?
When a company goes into administration, an independent registered liquidator is appointed as administrator. The administrator assumes control of the company’s business, property and affairs. The administrator may carry on, terminate or dispose of all or part of the business and may perform functions and exercise powers that the company or its officers could otherwise perform or exercise.
The directors remain in office, but they cannot exercise a function or power as an officer of the company without the administrator’s written approval. They must assist the administrator, including by providing the company’s books and information about its business, property, affairs and financial circumstances.
Administration is not the same as liquidation. It is a temporary process during which the administrator investigates and reports to creditors. Creditors ultimately decide whether the company should execute a deed of company arrangement (more on this later), whether the administration should end, or whether the company should be wound up.
Types of administration
The expression “involuntary administration” is sometimes used informally, but the Corporations Act does not establish a separate process by that name. Court-ordered winding up is liquidation, not administration. Under Part 5.3A, the practical distinction is how an administrator is appointed and whether the company later becomes subject to a deed of company arrangement.
Appointment by the directors (Voluntary Administration)
The board may appoint an administrator if it resolves that, in the directors’ opinion, the company is insolvent or is likely to become insolvent at some future time, and that an administrator should be appointed. This is the most common pathway and is generally called voluntary administration.
Appointment by a liquidator or provisional liquidator
A liquidator or provisional liquidator may appoint an administrator if they consider that the company is insolvent or is likely to become insolvent and that administration may produce a better return for creditors or members than an immediate winding up.
Appointment by a secured party
A secured party who is entitled to enforce a security interest over the whole, or substantially the whole, of the company’s property may appoint an administrator if the security interest has become, and remains, enforceable.
Deed of Company Arrangement
If creditors resolve that the company should execute a deed of company arrangement, the company moves from administration into deed administration. The deed regulates how the company’s affairs will be dealt with and binds the company, its officers and creditors to the extent provided by the Corporations Act and the deed.
What happens during administration?
The administrator takes control
The administrator controls the company and may continue trading, sell all or part of the business, or cease trading, depending on what the administrator considers appropriate. The administrator acts as the company’s agent and is personally liable for specified debts incurred in performing the administrator’s functions, subject to statutory rights of indemnity.
A temporary moratorium generally applies
Administration generally pauses individual enforcement action so that the administrator can assess the company and creditors can make a collective decision. Subject to exceptions in the Corporations Act:
- proceedings against the company or in relation to its property generally cannot be begun or continued without the administrator’s written consent or the Court’s leave;
- a person generally cannot enforce a security interest in the company’s property;
- an owner or lessor generally cannot take possession of, or otherwise recover, property used or occupied by the company; and
- a guarantee of the company’s liability generally cannot be enforced against a director, or the director’s spouse, de facto partner or relative, without the Court’s leave.
These stays are not absolute. For example, a secured party with security over all or substantially all of the company’s property may be able to enforce within the statutory decision period, and other specific exceptions may apply. Certain contractual rights triggered merely by the company’s administration may also be stayed, subject to statutory exclusions and exceptions.
The administrator investigates and reports
The administrator must investigate the company’s business, property, affairs and financial circumstances. The administrator must also form an opinion about whether it would be in creditors’ interests for the company to execute a deed of company arrangement, for the administration to end, or for the company to be wound up, and must report that opinion to creditors.
Creditors meet and decide the company’s future
The administrator convenes an initial meeting of creditors within the statutory period. At that meeting, creditors may decide whether to appoint a committee of inspection and whether to replace the administrator.
At the later decision meeting, creditors may resolve that:
- the company execute a deed of company arrangement;
- the administration should end; or
- the company be wound up.
The administrator’s report and recommendation inform the vote, but the decision is made by creditors.
How administration affects different parties
Directors
Directors lose control of the company’s business, property and affairs while the company is under administration. They cannot exercise their management powers without the administrator’s written approval and must cooperate with reasonable requests for records and information. Appointment of an administrator does not, by itself, release a director from existing duties or potential liability for conduct before the appointment. Directors may also have personal exposure under guarantees or other obligations, although enforcement of certain guarantees is stayed during the administration unless the Court grants leave.
A director considering administration should obtain advice urgently. The decision to appoint requires a properly formed opinion about insolvency or likely insolvency, and delay may affect the options available to the company and the director’s position.
Unsecured creditors
Pre-appointment claims are generally dealt with through the administration rather than individual enforcement. Unsecured creditors may lodge proofs of debt, receive the administrator’s reports, attend and vote at creditors’ meetings, and participate in any distribution under a deed of company arrangement or a later liquidation. The amount ultimately recovered depends on the company’s assets, the terms of any deed and the statutory priority regime.
Secured creditors and guarantee holders
The moratorium can restrict enforcement of security interests, but the Corporations Act preserves important exceptions. In particular, the holder of security over all or substantially all of the company’s property may have a limited period after receiving notice of the administration in which to decide whether to enforce. A creditor with a personal guarantee should obtain advice about the statutory stay, its duration and any application for leave.
Employees
The administrator decides whether the company will continue employing staff. Employees may have claims for unpaid pre-appointment entitlements. The treatment and priority of those claims will depend on whether the company enters a deed of company arrangement, returns to the directors or proceeds to liquidation, as well as the terms of any deed and the applicable statutory provisions.
Suppliers and retention of title creditors
Amounts owing for goods or services supplied before the appointment will ordinarily be pre-administration claims. A supplier’s ability to recover goods will depend on the contract, whether it has an effective security interest, compliance with the Personal Property Securities Act 2009 (Cth), and the administration moratorium. Suppliers asked to continue trading should carefully document post-appointment terms and confirm who is liable for payment.
Landlords and property owners
An owner or lessor is generally prevented from taking possession of, or otherwise recovering, property used or occupied by the company during administration without the administrator’s written consent or the Court’s leave. The administrator may retain premises temporarily while deciding whether the business will continue. Lease termination rights arising merely because the company is under administration may also be subject to the statutory stay on certain ipso facto rights and its exceptions.
Customers
A customer who paid before the appointment but has not received goods or services may have an unsecured claim. Whether an order will be fulfilled or a refund offered depends on the administrator’s decision about continued trading, the contractual position and the available assets. Customers should retain contracts, receipts and correspondence and follow the administrator’s proof-of-debt process.
When should you speak to an insolvency lawyer?
Directors should seek advice as early as possible, particularly if:
- the company cannot pay debts when they fall due, or expects that it soon may not be able to do so;
- creditors have issued demands, commenced proceedings or threatened enforcement;
- tax, employee, rent or finance arrears are increasing;
- cash flow difficulties are persistent rather than temporary;
- a secured creditor is considering appointing a controller or administrator; or
- the directors are unsure about insolvent trading, record-keeping or other duties.
Early advice does not necessarily mean that administration is the appropriate outcome. It allows the company’s financial position, restructuring options, director duties and creditor risks to be assessed before an urgent appointment or enforcement event dictates the available course.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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